Can Medicare save money for beneficiaries and taxpayers alike?

June 22, 2013

Since Medicare Part D went into effect in 2006, prescription drugs have been an integral part of the Medicare benefit package. So, the question of how seniors can save additional money on medications often comes up, but so does the question of how the entire Medicare Part D program can be more cost-effective and save taxpayers money without jeopardizing enrollee benefits.

A: Many seniors may not be aware that the infamous "doughnut hole," or gap in coverage, is closing thanks to the Affordable Care Act. Before the health care law was passed, if beneficiaries reached the initial limit on total drug expenses ($2,970 in 2013), they had no prescription drug coverage until they spent an added $3,700 out of their own pockets. But in 2013, people in the doughnut hole are receiving discounts of 52.5 percent on name-brand drugs and 21 percent on generics. These discounts will result in significant savings for about 4 million Medicare beneficiaries in 2013. More importantly, the discounts will continue every year until 2020, when the doughnut hole will be completely eliminated.

Q: Where can we find more value for Medicare dollars?

A: The best opportunity for finding smart savings in Medicare is looking for better deals on what Medicare pays for prescription drugs.

Plans that offer coverage under Medicare Part D are run by private insurers, and Medicare is prohibited from negotiating directly for discounts. An independent 2011 study by the Department of Health and Human Services' Inspector General found that drug manufacturers provide an average 19 percent discount to Medicare Part D plans, while state Medicaid programs receive a discount of 45 percent for the same drugs. This is a substantial savings that could be passed on to beneficiaries if Medicare was allowed to negotiate prices like Medicaid does.

Q: In what ways can Medicare get a better bargain on prescription drugs?

A: Substantial savings could come from obtaining discounts on drugs used by low-income beneficiaries. In fact, before Medicare Part D was enacted in 2003, drug manufacturers were required to provide discounts to low-income beneficiaries. Legislation that has been introduced both in the U.S. Senate and the U.S. House of Representatives, and the President's budget proposal, all call for these discounts to be restored. Estimates show that these discounts could save the Medicare program anywhere from $120 to $140 billion over the next 10 years.

The savings from these discounts could be used to improve other aspects of Medicare, or to reduce the deficit.

Q: Would higher discounts in Part D affect the pharmaceutical industry's research and development work?

A: Research and development actually thrived at the same time many of these deeper discounts were in place in the 1990s and early 2000s.

Q: Are there other ways for Medicare to save money on prescription drugs?

A: Other options for lowering the cost of the Part D program include allowing Medicare to negotiate directly with pharmaceutical manufacturers (like the Department of Veterans Affairs does), and letting Medicare operate its own Part D plan alongside private insurers. These alternatives are more complicated than the discounts discussed above, but they are worth considering in the future.

Q: Why do we need to search for savings in Part D?

A: In today's economy, leaders in Washington have tough choices to make about health care spending. It is true that Part D costs less than initially forecast, but that is because enrollment is about 25 percent lower than originally projected, and because increased use of generics has slowed drug spending overall. These developments should not prevent us from looking for better value for taxpayer dollars.